Is Analyst Coverage Worth $100,000 a Year?
from
January/February 2006
by Julie Connelly
Two new ventures are hoping that directors of companies routinely
ignored by Wall Street will say yes to that question. The potential
customer base is huge: More than 1,200 of the 6,000 companies listed on
U.S. exchanges get no coverage from security analysts at all, and
coverage is skimpy for another 979, with only one or two analysts
providing research. Put another way, 52% of the companies that trade on
NASDAQ and 20% of those listed on the New York Stock Exchange get
little coverage or none.
It’s no secret where being a Wall Street wallflower can leave a company. Its stock price is moribund, and to rub in the salt, it has to pay a lot more for capital that it might otherwise have raised from intrigued investors or from lenders. Research done for the Wharton School by Armando Gomes, Gary Gorton, and Leonardo Madureira finds that companies that don’t get coverage pay 138 basis points, or nearly 1.4 percentage points, more for their money per year than those that do.
Now there may be a glimmer of hope for the forgotten. Make that two glimmers. The National Research Exchange (NRE), a for-profit private company, and the Independent Research Network (IRN), a joint venture between NASDAQ and the news organization Reuters Group, have begun to put together similar businesses that will enable companies to buy analyst coverage. The two outfits are offering what they call “intermediated” research. Companies that want coverage can sign a contract with either organization, and it in turn will contract with analysts to put the research together. Thus company and analyst have no direct financial dealings—something that would be illegal under Securities and Exchange Commission rules.
Tying anybody down on the price is tough. But ballpark? Roughly $100,000 per analyst per year.
What’s in this for analysts? Money. Both the IRN and the NRE will pay the companies where analysts work for doing the research. And since these will not be direct company-to-analyst payments, they shouldn’t be breaking any regulations.
The research will be widely available. Reuters will distribute the IRN’s products electronically, and the NRE expects that its research-providers will dispense the reports to their clients just as they do their traditional research products. Wide distribution could make life unpleasant for companies that might collect unfavorable comment. The contracts must be prepaid and are for a minimum of two years at the NRE and three at the IRN. The NRE claims it has a few companies lined up, but as of late November it wasn’t disclosing details. The IRN was still building a sales force to contact companies.
Lining up analysts is also still in the works. As a first step, the NASDAQ-Reuters enterprise has put together a group of experts in securities law, equity research, and corporate management to come up with the criteria and standards that it will be looking for among research firms interested in doing the job. The NRE has a similar group. When companies sign on, the two networks will ask the research firms that have indicated an interest in working with them to quote a price for the kind of coverage a company might want—that is, so many reports a year, follow-up in research notes when earnings are released or the company announces some newsworthy event, willingness to introduce company management to the research firm’s institutional clients, and so forth.
It’s uncertain how much of the $100,000 fee these two middlemen will have to pass on to research-providers in the way of payment. Michael Mayhew, CEO of Integrity Research Associates in Darien, Connecticut, estimates that it costs a Wall Street firm $180,000 a year to fund research on one company and says that a company needs two or three analysts to cover it. In fact, each IRN contract specifies that three analysts from three different firms will provide the research. The NRE offers one analyst, although David Weild, its chief executive, expects that his clients will sign up for more.
How well these two new ventures will do is anybody’s guess. The demand for coverage is there. But beyond the cost, those who buy it will have to carry the additional risk of not knowing how much credence investors will put in research that has been bought and paid for, even if through a middleman. Still, says John Nesbett, president of Investor Relations Group in New York City, “there is an argument to be made that having good information out there is helpful, wherever it comes from.” More specifically, the research might translate into a lower cost of capital for small companies and even generate enough trading volume so that the companies would eventually get their research for free.
